Eurozone member states are preparing for a battle over whether the eurozone’s worsening economic outlook justifies a shift in economic policy and a relaxation of the eurozone’s strict fiscal rules.

With eurozone member states scheduled to submit their draft 2015 budgets and reform plans next month for scrutiny by the European Commission, France and Italy are pressing for the rules to be applied with greater flexibility.

Mario Draghi, the president of the European Central Bank, and until now a budget hawk, took eurozone governments by surprise when he used a speech in the United States on 22 August to call on eurozone governments to relax budget rules and to spend more on stimulating growth. He added his usual plea for governments to implement promised structural reforms.

His speech was interpreted as an about-turn that questioned the eurozone’s entire response to the crisis, and positioned Draghi closer to Renzi and Hollande.

This did not please politicians in Germany, the architect of the eurozone’s current policies. Angela Merkel, Germany’s chancellor, and Wolfgang Schäuble, Germany’s finance minister, reportedly called Draghi to protest.

Yet the conclusions of the extraordinary meeting of EU leaders on Saturday (30 August) recognised that the eurozone’s faltering recovery “raises significant concerns”.

The previous European Council meeting in July sketched out the terms of the impending debate on budget rules. It called on the Commission to make “best use” of the “existing” flexibility within the rules.

But EU officials question whether the existing rules can afford much flexibility to France or Italy. The Commission has the right to set new budget targets for member states or to discount spending on infrastructure, but only in specific circumstances.

Need for reform
In the absence of structural reforms by eurozone members, it will be very hard for the Commission to be more flexible. This will be the case even if Pierre Moscovici, a former finance minister in Hollande’s centre-left government, is appointed European commissioner for economic and monetary affairs. The consensus in Brussels is that neither France nor Italy has made sufficient progress in reforming their economies.

In April, Renzi announced a sweeping reform of Italy’s labour laws, but his proposal has drifted in the national parliament and, without renewed impetus from Renzi, will not be adopted before 2016. Reforms of Italy’s labyrinthine judicial system announced on Friday (29 August) could suffer the same fate. Renzi predicted in August that the government deficit in 2014 would be 2.9%. But Italy’s economy slipped back into recession in the second quarter of 2014, making it harder for Italy to meet its targets and harder for Renzi to reform.

Hollande has promised to cut taxes on businesses by €40 billion and public spending by €50bn by 2017. His government is expected to announce plans this month to liberalise protected professions including pharmacists, court administrators and dentists. But in the absence of greater flexibility, France will miss its budget commitments by a wide margin. After zero growth in the first half of 2014, the government expects its deficit to be more than 4% of gross domestic product (GDP) this year. The deficit was 4.2% in 2013, and – after benefiting already from two extensions – France is supposed to reduce its deficit to 3% – the eurozone limit – by 2015.

The real test for the Commission’s approach to deficit-reduction may prove to be Spain. Its centre-right government has been praised for the reforms it has made, and the Spanish economy is now growing. But its budget deficit is currently hovering around 6% of GDP: to meet its 2016 deadline, the government would need to cut spending by 3% of GDP. This would risk plunging the economy into recession just ahead of elections expected in the autumn of 2015.

There is not much time for eurozone leaders to decide on how flexible they will be. By October 15, eurozone member states must submit their draft 2015 budgets to the Commission. At the start of November the Commission will present its latest economic prediction for 2015. Then by mid-November, the Commission must issue an opinion on each budget. Under the existing rules, budgets that are projected to miss eurozone targets must be amended.